MLK WOULD SUPPORT OBAMA’S JOBS ACT

By Mike Green

April 16, 2012

On April 4, 1968, Dr. Martin Luther King was assassinated — just a few weeks before he was to travel to Washington D.C. with the intent of excoriating a stagnant nation over the issue of the American economy (see video).

On April 5, 2012, the most powerful Black man in the world, President Barack Obama, signed into law the historic JOBS Act and opened an unprecedented economic door for Black Americans that Dr. King would undoubtedly applaud.

JOBS ACT

The potential impact of the new law is currently being debated across the investor landscape. An analysis and explanation can be found here. But the debate boils down to three main points:

1. Potential for fraud due to loosening of Securities and Exchange Commission (SEC) regulations
2. Loss of third-party auditing and transparent disclosure requirements for up to five years for some firms earning less than $1 billion
3. Crowdfunding controversy concerning potentially naïve investors and entrepreneurs

CROWDFUNDING

Crowdfunding is the key component of this new law that unlocks the door to America’s racist past, which legally prohibited Black Americans from fully engaging in the processes of job growth and wealth creation. This is the forgotten issue in the debate between White pundits, protagonists and journalists. Yet, crowdfunding is the linchpin that makes the JOBS Act revolutionary.

The Crowdfunding piece of the JOBS Act pokes a hole in the 1933 Securities Act, which requires anyone offering to sell any portion of a company (equity shares or securities) to register with the Securities and Exchange Commission (SEC). The SEC has numerous regulations and costs that create an economic threshold over which only those with the money to play the investment game could cross. Companies that cannot afford to register with the SEC may apply for an exemption under Regulation D, which offers startups and other companies an opportunity to accept investments only from “accredited” investors.

ACCREDITED INVESTORS

The SEC defines individuals as “accredited” if they have a net worth of $1M or had an annual income exceeding $200,000 for the previous two years and a reasonable expectation of such income in the coming year. Additionally, the SEC set strict rules on the number of investors a company could pursue and their geographic location. Startup founders also must abide by SEC rules of engagement in approaching investors. Public offerings were prohibited without registering with the SEC or qualifying for an exemption.

The historic SEC rules created a community of qualified investors far beyond reach for the overwhelming majority of Black entrepreneurs seeking funding in the 1960s, and it remains today a legal gateway to a national network of investors  to which few Black entrepreneurs can gain access.

OCCUPY WALLSTREET

The news headlines that recently chronicled the OCCUPY MOVEMENT established a national focus on the 1 percent of Americans who own the vast majority of the nation’s wealth. Such prolonged media attention undoubtedly paved the political path for new rules of economic engagement that opened doors of access for the rest of America via the JOBS Act.

BOOTSTRAPPING

Most business startups fail due to lack of capital. In a knowledge-based, tech-driven innovation economy, disruptive ideas require teams of innovators working fulltime on the project to get it to a point where investors are interested. The costs during the “bootstrapping” stage of an idea are borne by the innovator(s). The bootstrapping phase is the region wherein most ideas die. It is the most volatile time period in which the entrepreneur races against time — while money is being spent to live and work on the idea — to find a business model that works and generates sustainable revenue for the company.

Venture capitalists, who typically invest public (pensions) and private dollars in “early” stage and “late” stage companies, are not engaged in the “seed” space, which overlaps into the bootstrapping phase and acts as an economic bridge to the “early” stage investment plateau.

Bootstrapping entrepreneurs must rely upon their own finances and those of family, friends and the proverbial “fool” to make it through the bootstrap phase. Those who make it retain full ownership of their companies as they move toward execution of a proven business model and growing the company. Bootstrapping innovators who require more capital than they have on hand to survive the time they have left before money runs out often turn to angels.

BLACK ENTREPRENEURS NEED ANGELS

Aptly named “angel” investors put their money at risk during bootstrap/seed period — a.k.a. the “Valley of Death” — to rescue worthy teams of innovators whose projects may have reached a competitive stage. Startup founders sell shares of their company to angel investors, who are typically “accredited” investors.

Black entrepreneurs are at a severe disadvantage in the risk capital game. Most do not have a family history of entrepreneurs, wealth or even knowledge of the economic process. Most Black entrepreneurs don’t have networks of family and friends who can assist them with funding, expert guidance or advice.

Most Black entrepreneurs are starting from nothing, with little or no resources, no entrepreneurial infrastructure, no access to mentors, no support system and a lot of steep mountains to climb. Even most college-educated Black Americans and many of their teachers and mentors are disconnected from the world of risk capital and knowledge of the innovation economy.

Still, 63 percent of young Black Americans, ages 18-34, participating in the Kauffman Foundation survey, “Young Invincibles,” reported they want to start their own business.

CROWDFUNDING CRUCIAL

Crowdfunding is an unprecedented opportunity for Black entrepreneurs today. The process of crowdfunding allows startup companies to use the Internet to raise up to $1 million from ordinary individuals who do not meet the SEC’s definition of “accredited” investor. There are still rules to be followed, of course, that identify who qualifies to invest and protect would-be investors of any kind. And the SEC is still working on the rules that will apply specifically across the new crowdfunding landscape.

CROWDFUNDING DISCOURSE

Today, pundits and protagonists debate the pros and cons of the JOBS Act. Some say they have concerns of investors being defrauded. Some believe the new law shields large companies from necessary regulations that protect both investors and consumers. These legitimate concerns all focus on opportunities for potential abuses, which exist in every law.

The primary point that such debates ignore is the fact that a Black president opened an economic door historically closed to Black Americans. The fact that this point isn’t being lauded by media, business leaders and elected officials is baffling. Even more perplexing is the muted response of Black media, business leaders and elected officials.

ECONOMICS: MLK TO OBAMA

Perhaps there’s a lack of understanding of the overall evolution of the economic landscape, which may account for the silence across Black America. It is important to understand how the American economic landscape evolved from the era of MLK to the era of Obama for the significant impact of the JOBS Act and the new economic frontier it has created to strike the heart. That requires delving briefly into the history of one of America’s most recognized family names: Rockefeller.

According to the Venrock website:

In the 1930’s, Laurance Rockefeller (1910-2004) pioneered early-stage venture capital in the United States by investing in Eddie Rickenbacker and James “Mac” McDonnell, the entrepreneurs behind Eastern Airlines and McDonnell Aircraft. Laurance was the fourth of six children of John D. Rockefeller, Jr. Over the next 20 years, he became well known as an investor of risk capital in young enterprises whose future was based on scientific and technological developments, including the fields of electronics, high temperature physics, composite materials, optics, lasers, data processing, thermionics and nuclear power.

In 1969, Laurance and his siblings formed Venrock in order to expand and “professionalize” this venture capital investment program.

In 1969, Venrock invested in Intel. By 2011, the firm that helped launch the venture capital industry had invested $2.6B in 450 companies yielding 128 Initial Public Offerings (IPOs) and 137 Mergers and Acquisitions (M&As). That one venture capital firm represented more economic wealth and value than all of Black America’s businesses combined in the era of MLK. The same statement remains true today in the era of Obama and an industry of risk capital that includes more than 400 hundred venture capital firms and several hundred angel investment groups.

ECONOMIC BUS LEFT BLACKS BEHIND IN 1969

Black Americans were left behind in 1969 when a new economic era was emerging. We weren’t riding in the back of the bus. We weren’t on the bus at all. And to make matters worse, we weren’t even at the bus stop and had no knowledge there was a line of economic transportation moving the nation toward significant urban renewal and exponential wealth.

We counted every door-opening accomplishment by individual Black Americans and measured our economic progress through ownership of real estate and consumer products. But Black America’s economic production through entrepreneurship and contribution to the overall competitiveness of the nation’s GDP reached its zenith in 2007. The sum total of our tremendous efforts amounted to less than 1 percent of the nation’s gross business receipts.

Black Americans were subsequently left behind each decade as the explosive growth of science, technology, engineering and math (STEM) industries produced roughly half of all economic growth in America over the past 50 years, according to the Department of Labor and National Science Foundation.

During each of those decades, the economically segregated public education system produced disparate achievement results along racial fault lines. Black unemployment remained consistently double the unemployment rate of Whites. And Black Americans had very little net worth while being legally and institutionally barred from fully participating in the risk capital industry. Today, White wealth is 20 times Black wealth. That gap cannot close without deliberate engagement and investment in high-growth entrepreneurship. Yet, the term “high-growth entrepreneurship” is foreign to many ears.

BLACK INNOVATION

Despite the racist rigors of the economic game, Black Americans were no strangers to innovation and entrepreneurship over the past several decades. As recently as 2002 to 2007, data show that entrepreneurship in Black America grew more than 60 percent to 1.9 million Black-owned businesses. Unfortunately, without investment of capital in those businesses, there was little opportunity to grow and produce jobs. The numbers are jaw-dropping:

• Of the 1.9 million Black-owned businesses in 2007, 1.8 million were sole proprietors with zero employees.
• All of the 1.9 million Black-owned businesses combined produced $137.5B, which equals less than 1 percent of the nation’s GDP.

NEW YORK TIMES’ ‘STUNNING’ COMMENT

This past summer, I had the pleasure of speaking with New York Times Deputy Managing Editor, Bill Schmidt at the National Association of Black Journalists (NABJ) Convention. When I introduced the data above, he responded with two words: “That’s stunning!”

Indeed, it is stunning that a public-private risk capital industry was developed in the era of Dr. Martin Luther King and built America into the most economically competitive nation on Earth, yet a consistent pattern persisting today reveals Black Americans remained disconnected from the infrastructures, ecosystems and benefits derived from decades of investments by governments and private sector companies and leaders. The pattern persists across the landscape of Hispanics and Native Americans as well.

VENTURE CAPITAL FUELS INNOVATION ECONOMY

There is no question that America has invested heavily in a knowledge-based, tech-driven global innovation economy. The federal government is all in, state governments are all in, venture capitalists are all in and the bets weigh heavily upon a competitive innovation economy that relies upon a flowing pipeline of innovative disruptive startups and young tech companies across industries.

The largest foundation focused on entrepreneurship in America is the Kauffman Foundation. It proclaimed in 2010 that nearly all net new job growth, since 1980, was due to companies five years old and younger. On average they produce 2-3 million jobs per year, while older companies and corporations lose one million jobs each year.

Last year, venture capitalists invested more than $30B in more than 3,000 companies. Angel investors added another $9B in the first half of 2011, with $3.5B targeting startup companies.

The goal of venture capital is to scale companies quickly. That ramping, due to equity risk capital, as opposed to debt financing from financial institutions, produces fast-growing young companies. The fastest-growing companies are called “gazelles” and account for 10 percent of new job growth in America each year. These rare companies represent less than 1 percent of young companies with 10 or more employees. When was the last time anyone talked about a Black-owned gazelle?

JOB GROWTH

The problem with the job growth discussion in Black America today is conversations and debates often center squarely upon low wage and mid-income job seekers. While that discussion is vitally important, so is the much-needed focus on job creation and inclusive competitiveness in today’s economy. Both discussions deserve our attention. But Black America appears focused solely on the job-seeking debates, conferences, summits and media repartee. Seldom do journalists engage in insightful discourse regarding inclusive competitiveness in the innovation economy.

Steve Blank, professor of entrepreneurship at Stanford University, says that Silicon Valley would still be just a bunch of smart engineers tinkering in their garages without a culture of risk capital. He’s not saying Silicon Valley needed venture capitalists and angels providing equity investments for the region to explode into the hub of global innovation as it is recognized today. He’s saying such investment was required to be embedded in the core DNA of the region to entice, encourage, stimulate, motivate, foster and nurture a thriving ecosystem of innovation.

The same sort of investment and willingness for Black Americans to put our money at risk is necessary to foster a culture of risk capital that creates the environment in which an innovation ecosystem is formed. But we have to at least engage in the discussion that leads to establishing policy that drives the activity that develops the foundation upon which an entrepreneurial ecosystem can be supported and an innovation ecosystem can thrive.

That discussion requires an understanding by the general public regarding how jobs are created in urban innovation ecosystems and will likely continue to be created through the rest of this century. Most Black Americans continue to remain disconnected from that discussion and debate.

OBAMA: AMERICA COMPETES

President Obama signed into law the America COMPETES Act on January 4, 2011. Section 604 of that Act requires that the Secretary of Commerce complete a comprehensive study of the economic competitiveness and innovative capacity of the United States by January 4, 2012. The appointed 15-member Innovation Advisory Board, charged with making recommendations to overhaul the nation’s innovation economy, didn’t consist of any strong voices in Black America. I wonder if most Black Americans were even aware such a law was passed and report produced?

The result of that report is summed up in four main sections:

Basic research — Findings conclude that while private citizens and businesses produced innovative ideas, the government played a key role in funding such innovations and should continue to do so.

Education — STEM education and workforce development is the key focus of the report’s recommendations in the arena of education.

Infrastructure — Broadband, road, rail and bridge projects all share center stage in the report’s focus on investing in the future.

Manufacturing — Recommendations for investing in manufacturing were built upon the premise of competitive strength, economic growth and job creation for the middle class. The report offers data on past performance of the manufacturing industry, ignoring the fact that the 9 percent of total job market share produced by the manufacturing industry today has plummeted from near 30 percent over the past five decades and isn’t making a 180 pivot to regain job market share anytime soon.

Unfortunately, when it comes to economic competitiveness, manufacturing is the only category mentioned by the presidential candidates this year when speaking of Black American participation in the economy.

INCLUSIVE COMPETITIVENESS

Today, the national focus on economic competitiveness is missing a word: inclusive.

The America21 Project is ensuring the term INCLUSIVE COMPETITIVENESS is heard in the White House during the Summit on Entrepreneurship for HBCUs (Historically Black Colleges and Universities) and MSIs (Minority Serving Institutions) on April 16, 2012. Johnathan Holifield, Esq. and Chad Womack, Ph.D. are both co-founders of America21 and engaged in leading panel discussions focused on inclusive competitiveness strategies.

Today’s Innovation Economy pioneers are racing to stake their claims in the 21^st century Innovation Gold Rush. Ironically, as this new economic era emerges at the hand of a Black president, Black Americans have remained virtually disconnected from the active economic metamorphosis that literally produced a new national trade organization just two weeks prior to Obama signing the JOBS Act into law. Black Americans cannot afford to remain disconnected.

America21 is leading a national effort to change the economic narrative across Black and urban America and connect the economically disconnected to regional innovation clusters and, as Holifield says, “focus on investing in where the proverbial puck is going, not where it is … and God forbid where it has been.”

I’m convinced that Dr. Martin Luther King would applaud an economic strategy built upon the foundation of inclusive competitiveness. And with an investment in equipping all Americans to engage in making this nation the best it can be, there’s no doubt it will regain its perch as the most economically competitive nation in the world. Crowdfunding is the crowbar that pries open the closed door of economic opportunity and allows all Americans to participate.

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Contact Mike Green at mike@blackinnovation.org

Twitter: @amikegreen2

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